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Five Popular Misconceptions on China’s Gradual Reform

Mar 21, 2011

The question of how to promote the reform has once again become a hot topic among government officials and ordinary people. Today, we must re-examine the term that has been familiar to us over three decades – “reform”. We must clarify issues such as what is our reform, what are its objectives, what approaches should be followed, and what are the costs to be involved. In this essay, I tries to discuss just one topic that is of great urgency: will the reform progress on its own momentum?

China’s economic reform has moved ahead step by step, a feature that has easily obscured the public’s awareness of the urgency involved. Many people usually argue like this: “What is impossible today will naturally become possible tomorrow. Isn’t that what has characterized our course of development?” This, however, is an assumption originating from five misconceptions.

The first misconception is that as the industrial economy grows and the market scale expands, the market economy will mature on its own.

This optimistic theory of “certainty” is very popular among our political, academic and business circles. When China became a WTO member 10 years ago, the whole nation came to the consensus that it would guarantee the full integration of the domestic economy into the world as well as unstoppable marketization reform that would “crash anyone standing in its way”. In recent years, however, monopolies have gained more clout, State-owned enterprises have squeezed out private businesses, crony capitalism has grown into a monstrous menace, and macro-intervention has become increasingly rampant in micro-economic affairs – all indicative of the evaporation of the dream of a self-maturing market economy.

The second misconception is that internal marketization reform may be achieved by introducing markets and capital from overseas.

Since 1978, China has stood by two objectives in its opening-up. One is to improve and upgrade its industrial structure with the introduction of capital and technology (or the so-called “exchanging market for technology” and “exchanging space for time”). The other is to introduce advanced industrial and commercial systems during the introduction of technology and capital (or the so-called “exchanging property rights for systems”). Judging by the current situation, this dream has evaporated. The core issues of China’s industrial progress over the past three decades were seldom solved through the introduction of capital and technology from the outside world. On the other hand, any system – no matter how sound and how advanced it is – cannot escape the fate of distortion if it doesn’t suit the country’s actual conditions or if it is not implemented in tandem with the overall reform of economic and social systems.

The third misconception is that the growth of capital outside existing systems will in itself facilitate the reform of these systems.

China’s economic reform during the first 15 years was mainly characterized by the rise of forces outside the existing systems. Thanks to their free spirit, township enterprises gradually grew from scratch into a force dominating half of the market even though they had no resources in the beginning because they were not part of the planned economy, As Wu Jinglian has put it, this was the success of an “incremental reform”. For a long time, people have believed that the capital groups rising from “incremental reform” would eventually achieve marketization reform by fully integrating with the inefficient capital within the rigid existing systems. In fact, this dream was shattered in the mid-1990s. Since the start of this century, the capital to downstream industries outside the existing systems has been further squeezed, marking a dead end to this approach of “external to internal reform”.

In this respect, people once placed great hope on the information revolution known as the “Third Wave”, especially the promising Internet industry, which was once regarded by many as the “yeast” for reform. However, such spontaneous certainty seems non-existent now. China’s economic history over the past 2,000 years presents a very pessimistic picture: restricted by centralized government control as well as other factors such as geography and population, several technological advances in our history (such as the “Rice Revolution” in the Song Dynasty and the “Cotton Revolution” in the Ming Dynasty) worsened the country’s isolation instead of improving it.

The fifth misconception is if the reform is unaccomplished, it can be reassigned to the next generation.

Any reform has a “time window”. A reform can achieve breakthroughs when there is fast economic growth and an established social consensus. Once the opportunity is lost, the reform might trigger social unrest. China is enjoying its best period of economic growth, with its urbanization staying on course and its demography being maintained. If it fails to take this opportunity to facilitate its reform with resolve, the consequences for another decade-long delay would be unimaginable. This year coincides with the 100th anniversary of the 1911 Revolution. In the late Qing Dynasty, the regime could not save itself from collapse despite its resolve to implement radical reforms because the “time window” for the reforms had expired. As French political philosopher Alexis de Tocqueville once put it, “The most dangerous moment for a bad government is when it begins to reform.”

These five misconceptions are not imaginary theories but rather empirical conclusions. China’s economic reform has exhibited two distinct characteristics over the past three decades: one is the “bottom-top” approach with grassroots progress promoting reforms in higher-level systems; the other is the scenario of “passive breakthroughs” – several major breakthroughs were made at helpless moments, when the looming failure prodded the government and the grassroots to carry the reform to new stages. This has given many people the expectation of guaranteed automatic progress, and caused them to believe that the next round of reform will also be “bottom-top” with a way out in dire situations. However, China is already the world’s second-largest economy. The price for any error or delay in its reform will be increasingly great. Future reform must involve active, top-down progress with a more extensive scope. It is impossible to achieve a genuine, thorough structural reform in the economic domain alone – at least this has never happened in world history.

Back in 1979 when China had just inaugurated its reform and opening-up policies, Virlyn W. Bruse, a Polish British economist and the leading theorist of market socialism, was invited to China for academic exchange. After lecturing his Chinese peers on the experience and lessons of the reforms in Eastern Europe, Mr. Bruse warned time and again: “The prerequisite for a structural reform of the economic system is a structural reform of the social system. The only way to prevent the process from returning to the old track is to take measures to reform the systems. Ultimately, reform is a political and social issue.” This inspiring remark still applies today. When the reform gets to the stage for tough battles, any new progress will no longer be accidental or spontaneous – instead, it requires greater resolution, initiative and intelligence.

Wu Xiaobo is a columnist long dedicated to the research of Chinese companies.

Original Chinese Version HERE 

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